Microsoft's masterplan to screw phone partner – full details

If Microsoft's extended family of lawyers was thinking it could now kick back and anticipate a kind of extended Spring Break for the rest of this Bush administration, the pre-Xmas filing by British phone company Sendo could yet be the cause of a few unexpected late nights.

Sendo's 27-page filing in a Texas court - disclosed here for the first time - is a rich litany of double dealing, betrayal and larceny - if the dramatic (and at times apoplectic) allegations can be believed.
Until November, Sendo was Microsoft's flagship phone OEM. It then announced that its four-times-delayed Z100 Stinger phone would be canned, and threw its lot in with Nokia, terminating the Microsoft agreement.

Formally, Sendo is throwing the book at Microsoft. The handset manufacturer, created in 1999 with some of the best Philips and Motorola talent, was to be Microsoft's "go to market partner" for the Stinger smartphone platform, and even received an equity investment from Redmond, and it's now very, very angry.

The claim alleges - are you ready to start counting? - misappropriation of trade secrets, common law misappropriation, conversion, unfair competition, fraud, breach of fiduciary duty, two counts of negligent misrepresentation, two counts of breach of contract, fraudulent inducement and tortious interference. Phew.

If Sendo's case progresses, it's likely to add new stars to the litigation firmament - one which has already brought us phrases such as "cut off the air supply", "knife the baby" and faked videotape evidence, and the most likely star in this turn should be one Marc Brown, who simultaneously served as a Sendo director while being employed by Microsoft. More on Marc in a moment.

The case alleges a "Master Plan" to swindle the Brum-based startup out of its trade secrets. Sendo says it delivered a unique industry insight to Microsoft through this partnership, insight that the industry (as represented by Nokia, Ericsson, Motorola and the Japanese manufacturers) weren't themselves willing to share.

But it was never a partnership of equals, alleges Sendo, and after promising that StinkerOS was ready in the middle of last year, Microsoft used the delays to uncover Sendo's integration secrets and carrier relationships, and then cut off their air supply, using this knowledge to promote its new sweetheart, the Orange SPV instead.

Sendo's tale

Here's how it runs.

In February 2001, Microsoft and Sendo formalize and publicly announce their partnership, and Microsoft buys $12m of Sendo shares, and a seat on the board. Microsoft promises to ship its part of the deal, the "code complete" StingerOS to the manufacturer by June. That's good, because Sendo had planned to ship the first phones in August and December.

Both parties are delighted. Sendo has been operating for less than two years, and the deal gives it an opportunity to be first to market with a phone that has Microsoft massive marketing budget behind it. Microsoft is pleased: although it has been toting its software to cellphone manufacturers for several years, Sendo is the first OEM to bite. As it dryly notes in its filing:

"Microsoft had been unable to successfully access the wireless market because the handset manufacturers would not use their software."

Only summer comes, and the code isn't ready. It isn't ready in the autumn, either, and this starts to play hell with Sendo's budgets. December rolls round, and according to Sendo, bugfixes that carriers have requested are being refused by Microsoft. Sendo is in a cash crisis, and a call to VCs is spurned. So Sendo asks Microsoft for a further cash injection, which is declined:

"Microsoft refused with the full knowledge that this refusal would push Sendo to insolvency", claims Sendo in the filing.

How did it know? Well, meet Marc Brown, who was by now acting in his capacity as a Sendo board member while continuing his day job as the director of Microsoft's corporate development and strategy group.

At this point Brown suggests that Microsoft convert the share deal into a loan, repayable in three stages, and in February (last year), Sendo agrees. Stinker still hasn't shipped, so Sendo can't sell a phone. Microsoft refuses to pay Sendo some capital that was scheduled under the earlier agreement, Sendo alleges, and by spring the relationship has deteriorated to the level of legal threats.

However on the surface, all appeared to be cordial, and at a board meeting in May last year Brown pledged that Microsoft was "not working with anyone else as an 'initial go to market partner'".

This we now know to be false.

From May onwards, says Sendo, Microsoft aggressively demanded technical meetings which extracted valuable technical and commercial information out of Sendo. Then demands got funny: Sendo claims that Microsoft demanded it cease all other development to ship the Stinker; and asked for an expensive and onorous test run of 300 Z100 prototypes.

Now, remember that Microsoft had no business relationships with carriers as a handset provider, while Sendo staff were pretty well versed in what to do. This, Sendo alleges, is what Microsoft's "Master Plan" was all about. As it claims:

"They were not entitled to such information under the terms of the SDMA" - the precursor to the February 2001 agreement that the two inked in the fall of 2000.

In fact, this SDMA turns out to have been Sendo's death warrant. As the company explains:

"Under the SDMA, in the event of a Sendo bankruptcy, Microsoft would obtain an irrevocable, royalty free license to use Sendo's Z100 intellectual property, including rights to make, use, or copy the Sendo Smartphone to create other to create other Smartphones and to, most importantly for Microsoft, sublicense those rights to third parties."

And that's the crux of the case.

Sendo's description of a "master plan" to rob it of its secrets might look like paranoid nonsense, were it not for the fact that in that SDMA, Sendo's demise was in foretold. Microsoft had far more to gain than it had to lose by seeing its partner fall.

This being a civil case, we're not quite sure where the burden of proof lies [reader advice is as ever, welcome]. Were Sendo a bunch of incompetent klutzes who didn't know how to integrate the perfect phone software they received from Microsoft in a timely fashion? Or was Microsoft lying when it said it could ship a carrier-grade phone OS to Sendo in the summer of 2001?

From the Orange SPV buglist, it still doesn't look like Microsoft can ship a carrier-grade phone OS eighteen months later. But this is a court case, and Sendo must prove it. If the discovery phase is half as imaginative as it could be, we're in for a treat.

Background

Microsoft's dalliance with cellphones is interesting for a couple of reasons. Firstly, because phones are morphing into a computer platform of great social value in unimaginably great volumes, only they're pouring into a terrain, a business that Microsoft doesn't yet own or fully understand. Microsoft was clever enough to understand that volume economics worked, when Bill Gates with great foresight engineered the PC DOS license. So Microsoft understands volume economics. That we know.

More interesting than that, though, is how this battle pitches two models of capitalism against each other. These are two worlds apart, and the "OS War" between Microsoft and Symbian/Nokia is a symptom, but it isn't the real story.

To Americans, the telecom world's model of promoting growth through vertical investments (a Nokia or an Ericsson bails out the carriers) and through IP sharing (yeuch!), and promoting common standards (that's goddam Communism!), must look like a filthy and incestuous business.

To Europeans and Asians, though, the red-blooded, last-man-standing American model as exemplified by Qualcomm and Microsoft - backed as they are in trade negotiations by the armed might of the US Government, the world's only superpower - looks like the odd fellow.

They're a bunch of geeks who don't share their hoard and don't know how to partner a relationship, the market tells us. They act like children! And the world seems to be stampeding - irrationately or not, you decide - to the Euro-Asian model, even adopting technologies that don't really work just yet - such as WCDMA, rather than Qualcomm's smarter cdma2000 - because they offer the buyers a choice of multiple (non-US) suppliers. Which maybe isn't so irrational if you think about it.

Back in 1998, the phone companies decided to pool their resources on a wannabe smartphone OS from PDA-pioneer Psion Computer. The formation of Symbian caused Bill Gates much agitation [as these now-legendary memos show], but it's to his credit that he identified the company as Microsoft's No.1 enemy. In this case, at least, Microsoft's paranoia was fully justified.